5) Buffer Stocks - MB

Question 1

define a buffer stock…

Answer 1

a scheme intended to stabilise the price of a commodity by buying excess supply in periods when supply is high, and selling when supply is low

Question 2

what is a commodity?

Answer 2

an unfinished product, eg wheat and oil

Question 3

give examples of buffer stocks:

Answer 3

• International Cocoa Organisation
• Australian Wool
• US strategic petroleum reserve
• Thai rice
• EU CAP:
  1) syrup stockpiles
  2) butter mountains
  3) wine lakes

Question 4

why can prices be volatile in some commodity markets?

Answer 4

due to an unusually large shortage or surplus

Question 5

what can shortages be caused by?

Answer 5

drought, disease, war or flooding

Question 6

how can surpluses be caused?

Answer 6

by particularly favourable weather conditions

Question 7

what do buffer stocks seek to do?

Answer 7

where produce can be stored for a long time, buffer stocks seek to stabilise prices over multiple years by buying in a glut year and selling in a shortage year

Question 8

what are the two advantages of buffer stocks?

Answer 8

1) its a market based solution
2) may be self-funding

Question 9

what are the two disadvantages of buffer stocks?

Answer 9

1) limited deployability
2) may be expensive

Question 10

what do buffer stocks incentive producers to do? (market based solution)

Answer 10

incentivises producers to continue investment in production

Question 11

how could buffer stocks be self-funding?

Answer 11

profits earned in shortage years can pay for produce bought in glut years and for the operational costs of the scheme

Question 12

how do buffer stocks cause limited deployability?

Answer 12

deployment limited to commodities that can be stored for years

Question 13

how can buffer stocks be expensive?

Answer 13

shortage years cannot be predicted so stores may end up being destroyed or dumped on markets in other countries instead of sold at a profit

Question 14

what are the two reasons why a buffer stock compares favourably to a subsidy?

Answer 14

1) operating a buffer stock may be cheaper if its self- funding
2) as a market based solution, during years when prices fluctuate between PMAX and PMIN producers are disciplined by competition instead of becoming dependent on subsidies

Question 15

what are the two reasons why a buffer stock compares unfavourably to a subsidy?

Answer 15

1) if the surplus is large, the cost of purchasing it may be unaffordable - costs are unpredictable
2) in a surplus year, the buffer stock increases prices to consumers instead of reducing them like a subsidy

Question 16

Analysis of Diagram: why are supply curves perfectly inelastic?

Answer 16

As supply can only be increased in the long term

Question 17

Analysis of Diagram: how is market failure caused

Answer 17

Market failure is caused by imperfect future information

Question 18

Analysis of Diagram: how is market failure corrected when there is a shortage?

Answer 18

Market failure is caused by imperfect future information and is corrected, to some extent, by provision of goods from the buffer stock, increasing quantity consumed from Q2 to Q4; closer to the allocatively efficient level of consumption

Question 19

Analysis of Diagram: what do buffer stocks allow if there is a shortage?

Answer 19

Because this Drives prices down it allows more consumers to derive Utility from the consumption of the good reducing the inequity caused by differences in wealth

Question 20

What do the prices fluctuating between P1 and P2 show?

Answer 20

If there is no intervention, which will create uncertainty. A high level of uncertainty disincentives producers from investing in production, further exacerbating future supply and price volatility

Question 21

What does the government do when price falls below P min?

Answer 21

A government buffer stock buys Q3 to Q1, increasing price from what otherwise would be P1and therefore the certainty for producers

Question 22

What can happen to the stock if there is a shortage?

Answer 22

Sold at Q2 to Q4 wheb a shortage leads to the price rising above P Max perhaps earning P2